Monthly Archives: December 2011

NLO Dividend Watch List: December 23, 2011

The S&P 500 exploded to the upside on Friday bringing the index into positive territory for the year. It has been a slightly different story for the blue chip Dow Jones Industrial Average, which is up 6% for the year.

There may be some bargains to be had in our list of 21 companies that are within 11% of the low.

December 23, 2011

Symbol Name Price % Yr Low P/E EPS (ttm) Dividend Yield Payout Ratio
TR Tootsie Roll Industries Inc  23.74 4.03% 32.97 0.72 0.32 1.35% 44%
BMO Bank of Montreal 54.4 4.96% 10.84 5.02 2.72 5.00% 54%
JW-A John Wiley & Sons Inc 43.99 5.01% 15.44 2.85 0.80 1.82% 28%
BCR CR Bard, Inc. 85.12 5.35% 21.88 3.89 0.76 0.89% 20%
FRS Frisch’s Restaurants, Inc 19.5 5.75% 22.16 0.88 0.64 3.28% 73%
WST West Pharmaceutical 37.55 5.77% 20.75 1.81 0.72 1.92% 40%
BDX Becton, Dickinson and Co. 74.44 6.97% 13.25 5.62 1.80 2.42% 32%
EXPD Expeditors Intl.of Washington 41.07 7.37% 22.69 1.81 0.50 1.22% 28%
LM Legg Mason, Inc.  24.45 8.14% 14.91 1.64 0.32 1.31% 20%
AVP Avon Products, Inc. 17.48 8.64% 10.28 1.70 0.92 5.26% 54%
OMI Owens & Minor, Inc. 28.13 8.74% 15.80 1.78 0.80 2.84% 45%
MATW Matthews International Corp.  31.07 8.75% 12.63 2.46 0.36 1.16% 15%
AROW Arrow Financial Corp.  23.44 9.02% 12.67 1.85 1.00 4.27% 54%
CAH Cardinal Health, Inc.   40.96 9.14% 16.00 2.56 0.86 2.10% 34%
SCHW Charles Schwab Corp. 11.54 9.28% 17.22 0.67 0.24 2.08% 36%
T AT&T Inc 29.87 9.82% 15.16 1.97 1.76 5.89% 89%
CLX Clorox Co. 66.59 9.96% 19.19 3.47 2.40 3.60% 69%
BMS Bemis Co Inc 29.94 10.03% 15.05 1.99 0.96 3.21% 48%
CWT California Water Service 18.35 10.21% 18.72 0.98 0.62 3.38% 63%
ANAT American National Insurance 72.75 10.71% 11.30 6.44 3.08 4.23% 48%
UTX United Technologies Corp. 74.18 10.93% 13.92 5.33 1.92 2.59% 36%
21 Companies






Watch List Summary

Tootsie Roll (TR) leads our dividend list by being 4.03% above the one year low.  The chart below shows that in the last 13 years, if TR were bought around the current level, a gain of 20% is achieved in the subsequent 18 months or less.  According to Dow Theory, the minimum retracement of the current price decline from the high is to $26.40 or 11.20% above $23.74.  The downside risk is fairly limited if viewed from the perspective of the 2009 low.  At the current price, TR would need to fall -17.81% in order to accomplish the March 9, 2009 low.  This is an ideal candidate to consider for a stock that has increased its dividend for 47 years in a row, a dividend payout ratio of less than 50% and an additional 3% stock dividend that has been paid since 1966 to go along with the 1.30% cash dividend.
The Punchline: Tootsie Roll (TR) can be purchased at the current level in large quantities relative to other positions in your portfolio.  A second purchase could be done in an equal number of shares if the price declines to the 2009 low.
Bank of Montreal (BMO) has fallen –18.37% from the high      of April 2011.  The one-year low was at $51.83.  According to Dow Theory, BMO has established downside targets, from the high, of $51.06, $35.48 and $19.90.  It is interesting to note that BMO came close to the first downside target and has reversed.  In the short term, we believe that $57.66 is the minimum upside target for the stock based on the established downtrend.  However, if the price of BMO goes below the $51.06 level, we should expect a test of the $35.48 level.
The Punchline:  If BMO is considered for purchase then it should broken into thirds.  Although we favor strong Canadian banks of most U.S. banks, we recommend that any purchase of BMO be small relative to other stock holdings in your portfolio.  No additional purchases should be made of the stock rises after the initial purchase.
John Wiley and Sons (JW-A) is within striking distance of the 52-week low.  According to Dow Theory, based on the low in 2008 to the most recent high, the first downside target is $43.94.  However, with the stock currently at $43.99, there is the possibility that JW-A could fall to the second Dow Theory support level of $34.84.

The Punchline: John Wiley is a content provider/aggregator in a world seeking content.  Although the stock might be challenged in the short-term, the longer-term picture may favor JW-A.  However, we’re waiting for clarity on the $43.94 support level.

Sidenote: A company that is on our radar this week is Cardinal Health (CAH). After soaring to a high of $47 this year, the stock retreated as low as $37. The current yield of 2.1% implied that it is 31% undervalued (based on IQTrends [http://www.iqtrends.com/] range of 1.6% yield). This is the first time CAH is on our watch list since our recommendation of the stock in June 2009 (found here). The company spun off the CareFusion (CFN) division since our 2009 recommendation.

Top Five Performance Review

In our ongoing review of the NLO Dividend Watch List, we have taken the top five stocks on our list from December 23, 2010 (not published) and have check their performance one year later. The top five companies on that list can be seen in the table below.
Symbol Name 2010 Price 2011 Price % change
CAG ConAgra Foods, Inc. 22.40 26.6 18.75%
ABT Abbott Laboratories 47.81 56.02 17.17%
SYY Sysco Corp. 29.05 29.43 1.31%
CLX Clorox Co. 63.81 66.59 4.36%
KMB Kimberly-Clark Corp. 63.22 73.73 16.62%



Average 11.64%





DJI Dow Jones Industrial 11,573.49 12,294.00 6.23%
SPX S&P 500 1,256.77 1,265.33 0.68%

Our list from last year did extremely well. The top five beat the Dow by five percentage points, excluding dividends. Four of the top five stocks, except Kimberly Clark (KMB), reached the 10% mark within 6 months.

Disclaimer:

On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies’ most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.


Please consider donating to the New Low Observer. Thank you.

Dow Theory Applied to Silver?

A reader asks:

“How do you relate Dow Theory to the Silver market?”

Our response:

Charles H. Dow was first an economist, then a commodities expert and finally a stock market analyst. Before Charles H. Dow co-founded the Wall Street Journal, he was better known for writing the “Leadville Letters” for the Providence Journal. The “Leadville Letters” reported on Colorado’s silver mining boom in 1879. After co-founding the Wall Street Journal, the lessons learned in the silver mines ofColorado were found to have application on Wall Street.

Charles Dow was keenly aware of the importance and correlation between commodity prices and stock prices. Many of Dow’s articles in the Wall Street Journal were focused on the movement of commodity prices and all costs of production that went into commodity prices from shipping to the finished product.

As an example, Dow made the following observation:

“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period.”

Much of Dow Theory is based on Dow’s observation of the price action of commodities and then later applied to stock prices. The application of Dow Theory to the price of silver, gold or almost any other commodity is bringing Dow’s work back to its roots. In fact, Dow’s observations in commodities and then later applied to stocks is the basis for much of the modern fundamental and technical analysis that is done today, which includes the quest to determine the “value” of a company and the uses of Fibonacci numbers.

Dow Theory is applicable to all prices that are subject to the whims of market forces. Dow Theory also accounts for manipulation and hoarding. Dow Theory attempts to account for what can reasonably be expected of price action in the not too distant future.

Sources:

  • Dow, Charles. Review and Outlook. Wall Street Journal.February 21, 1901.
  • Bishop, George W. Jr. Who Was the First American Financial Analyst? Financial Analysts Journal, Vol. 20, No. 2 (Mar.-Apr., 1964), p.26-28.
  • Bishop, George W. Jr. New England Journalist: Highlights in the Newspaper Career of Charles H. Dow. The Business History Review.Vol. 34, No. 1 (Spring, 1960) p. 77-93.
  • More on Dow Theory from NLO

Dow Theory: 1907-1910

Bull market indication (A): According to Edwards and Magee, the bull market began on April 24, 1908. The New Low Observer believes that on January 9, 1908 (C), the DJI & DJT confirmed that we’re in a bull market by going above the December 6, 1907 intermediate peaks. From the point (C) of the bull signal to the respective market tops, the DJI gained 55% and DJT gained 44%.
Bear market indication (B): Edwards and Magee indicated that on May 3, 1910, the bear market signal was initiated.  However, we believe that on January 12, 1910 (D) the DJI confirmed the  DJT bearish move of falling below the September 9, 1909 low. From the point of the bear signal (D) to the respective market bottoms, the DJI lost -23% and the DJT lost -16%.

iShares Silver Trust (SLV) Update

The iShares Silver Trust (SLV) ETF has fallen in line with our assessment from May 5, 2011.  However, it is times like these that we get nervous about our ability to believe that the price action of SLV will continue on a forecast that was presented over six months ago.  Back in May, we said the following:


…we should see SLV tread water for a brief period of time before falling back to the prior low which began with the current run back in November 2008.   Dow Theory suggests that a reasonable buying opportunity would exist at [or] below line B (blue line B).
Currently, the “blue line B” is around $24.31 and rising as time passes.  In our May Dow Theory interpretation of SLV, the price fell right through line B in 2008 without any hesitation.  We’re not so certain that such action will occur this time around.  As long as SLV can hold above the Dow Theory fair value of $28.15, there is a good chance silver will be able to rebound in a meaningful fashion.  However, closing below $28.15 (again) could be a confirmation of the downtrend.    
Many precious metal enthusiasts are arguing that what happened in 2008 was an outlier event for silver and therefore is unlikely to happen this time around.  It is hard to argue against such a view. However, it is difficult to get the period from 1974 to 1976 out our mind (visual here) when gold fell 50% and gold stocks fell 66% in the middle a gold bull market.  
Below is our updated chart of SLV reflecting the most recent price action:
The Punchline: If you like the idea of investing in silver, then a buying opportunity should be at/or below the blue line B ($24.31).  However, don’t go all in, just in case the dashed blue line does materialize at $17.

 

Nasdaq 100 Watch List: December 16, 2011

Below are the Nasdaq 100 companies that are within 10% of their respective 52-week lows. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and rigorous due diligence.
Symbol
Name Trade P/E EPS Yield P/B % from Low
BMC BMC Software, Inc. 33.17 13.59 2.44 N/A 3.76 0.79%
VMED Virgin Media Inc. 20.95 67.58 0.31 0.70% 5.02 1.01%
CTRP Ctrip.com International, Ltd. 23.1 19.88 1.16 N/A 3.08 1.32%
SYMC Symantec Corporation 15.46 17.59 0.88 N/A 2.49 1.51%
BRCM Broadcom Corporation 28.72 17.29 1.66 1.30% 2.46 2.39%
LRCX Lam Research Corporation 35.92 7.45 4.82 N/A 1.85 2.86%
SRCL Stericycle, Inc. 76.51 30.36 2.52 N/A 5.49 4.74%
WYNN Wynn Resorts, Limited 105.65 24.66 4.28 2.00% 5.04 5.11%
EXPD Expeditors Int’l of Was 40.37 22.3 1.81 1.20% 4.37 5.54%
FSLR First Solar, Inc. 31.91 5.24 6.09 N/A 0.67 6.23%
AMAT Applied Materials, Inc. 10.33 7.12 1.45 3.10% 1.51 6.49%
HSIC Henry Schein, Inc. 62.44 16.39 3.81 N/A 2.23 6.74%
CHRW Robinson Worldwide 66.59 25.91 2.57 2.00% 8.6 6.89%
DTV DIRECTV 42.1 13.12 3.21 N/A N/A 7.62%
GILD Gilead Sciences, Inc. 37.16 10.86 3.42 N/A 4.76 7.87%
CA CA Inc. 20.12 11.81 1.7 1.00% 1.73 8.11%
NTAP NetApp, Inc. 35.71 21.76 1.64 N/A 3.42 8.21%
WCRX Warner Chilcott plc 14.02 36.89 0.38 N/A 88.81 8.68%
AVGO Avago Technologies 28.8 12.87 2.24 1.50% 3.76 9.01%
RIMM Research In Motion 13.44 2.45 5.48 N/A 0.79 9.19%
INFY Infosys Limited 50.37 18.12 2.78 1.10% 4.73 9.22%
MSFT Microsoft Corporation 26 9.45 2.75 3.10% 3.62 9.94%
Watch List Summary
BMC Software (BMC) has not only fallen to a new 52-week low, it has also fallen to a 2-year low.Based on the decline so far, according to Dow Theory, BMC could retrace to the $40 level.Fair value for the stock is at $44.86.The $40 level seems reasonable within the next year for BMC even though it is 20% above the current price.The most obvious downside target for BMC is the October 2008 low of $22.A decline of $22 would equal a loss of 33%.
It should be noted that despite the market turmoil of 2008, BMC did not fall to the 2006 low.Additionally, the long term support line as drawn in the chart for BMC indicates that $22 ultimate price to watch for. If BMC were to replicate the percentage decline from the May 2008 top to the October 2008 low, the stock would decline to a price of $31.11.
The Punchline: Those interested in BMC could split their investments into two transactions.The first purchase could be done between Friday’s closing price and $31.11 and the second if the stock declines to the $22 level. No additional shares should be bought if the price increases.
Virgin Media (VMED) has an almost uninterrupted price movement from the low in 2008 to the most recent high of $33.32 in May 2011.According to Dow Theory, VMED broke just below the initial support level of $23.30.The next downside target is the 50% principle level of $18.29.Once breaking below $18.29, VMED could be expected to drop to the $13.28 level.The next upside target for VMED is $25.07 which assumes the best case scenario.
 
However, when contrasting the price movement of VMED to BMC during the decline of 2008, the price of VMED gave up all of the gains from 2004 to 2006 and then some.Those interested in VMED should be willing to accept the stock price to decline to the $13.28 in a worst case situation.
The Punchline:There is significant price support at the $14 level for VMED.This transaction should be broken into thirds with an equal number of shares being bought at each level on the downside.No additional shares should be bought if the price increases.
Ctrip.com International (CTRP) is on a pace to replicate the performance from the high in April 2008 to the low of January 2009 which equaled a loss of 72%. A similar decline in CTRP from the high of $50.57 would bring the price down to $14.16.Suffice to say, the stock “only” needs to decline another $8.94 or 38% from the current price of 23.10.This seems very easy considering the high volatility of Chinese stocks.We believe that unless CTRP is summarily dismissed from the Nasdaq 100 index, there may yet be life in this company.
 
We believe that the Nasdaq 100 committee added CTRP to the index based on the performance of Priceline.com (PCLN).Amazingly, at the current price of $23.10, CTRP sits one penny below the 2nd Dow Theory support level of $23.11.any further deviation below the current price almost ensures that the stock is destined for the $10 range.
The Punchline: Watch and wait for CTRP to establish a solid support level.The nearest upside target is $32.26.

 

Watch List Performance Review
In our ongoing review of the Nasdaq 100 Watch List, we have taken the stocks from our list of December 10, 2010 (found here) and have checked their performance one year later. The companies on that list are provided below with the closing prices from December 10, 2010 to December 9, 2011.
Symbol Name 2010 2011
% change
CSCO Cisco Systems, Inc. 19.70 18.88
-4.16%
ISRG Intuitive Surgical, Inc. 260.07 440.4
69.34%
AMGN Amgen Inc. 53.89 58.59
8.72%
DISH DISH Network Corp 18.80 25.83
37.39%
APOL Apollo Group, Inc. 37.95 50.36
32.70%
Average
28.80%
^NDX Nasdaq 100 Index 2,207.45 2,318.68
5.04%
The performance of the top five stocks from last year was amazing. The average performance was five times better than the Nasdaq 100 index in the same period of time.
Disclaimer:
On our current list, we excluded companies that have no earnings. Stocks that appear on our watch lists are not recommendations to buy. Instead, they are the starting point for doing your research and determining the best company to buy. Ideally, a stock that is purchased from this list is done after a considerable decline in the price and extensive due diligence. We suggest that readers use the March 2009 low (or the companies’ most distressed level in the last 2 years) as the downside projection for investing. Our view is to embrace the worse case scenario prior to investing. A minimum of 50% decline or the November 2008 to March 2009 low, whichever is lower, would fit that description. It is important to place these companies on your own watch list so that when the opportunity arises, you can purchase them with a greater margin of safety. It is our expectation that, at the most, only 1/3 of the companies that are part of our list will outperform the market over a one-year period.